Chapter 3 Flashcards
Financial Ratios
Profitability ratio
liquidity ratio
solvency ratio
relate to the companys performance in the current period
profitability ratios
it shows the companys ability to generate income
profitability ratio
relate to the companys short term survival
liquidity ratios
it shows the companys ability to use current assets to repay liabilities as they become due
liquidity ratios
it measures the short-term ability of the enterprise to pay its obligation and to meet unexpected needs for cash
liquidity ratios
relate to the companys long-run survival
solvency ratios
it shows the companys ability to repay lenders when debt matures and to make the required interest payments prior to the date of maturity
solvency ratio
Ratios in Profitability
Net profit margin or return on sales
Return on total assets
Return on Equity
Gross profit percentage
asset turnover
fixed asset turnover
earnings per share
price/earnings ratio (P/E)
Dividend yield
dividend pay-out
represents the percentage of revenue that ultimatelt makes it into net income, after deducting expense
net profit margin or return on sales
it determines the amount of income by owners
net profit margin or return on sales
efficiency with which assets are used to. operate a business
return on total assets
it compares the amount of net income to average stockholders equity
return on equity
it reports the net amount earned during the period as a percentage of each peso contributed by stockholders and retained in the business
return on equity
it indicates how much profit was made, on average, on each peso of sales after deducting the cost of goods sols
gross profit percentage
it indicates the amount of sales revenue generated for each peso invested in assets during the period
asset turnover
it indicates how much revenue the company generates for each peso invested in fixed assets
fixed asset turnover
it indicates the amount of earnings generated for each share of outstanding common stock
earnings per share
it indicates the number of pesos required to buy 1.00 or earnings
Price/Earnings Ratio
it measures the rate of return in the investors common stock investments
dividend yield
it indicates the proportion of earnings distributed as dividends
dividend pay-out
Ratios in Liquidity
Current ratio
quick ratio
cash ratio
receivables turnover
average age of receivables or days sales outstanding
inventory turnover
average age of inventory or days in inventory
raw materials inventory turnover
goods in process turnover
days in operating cycle
trade payables turnover
average age of trade payables or days in trade payables
cash conversion cycle
current asset turnover
it measures the companys ability to pay its current liabilities
current ratio
it is a measure of adequacy of working capital
current ratio
it is the primary test of solvency to meet current obligations from current assets
current ratio
what are quick assets
cash
short term investments
accounts receivable
this ratio is a much more stringent test of short term liquidity
quick ratio
it measures the number of times that the current liabilities could be paid with the available cash and near cash assets
quick ratio
it measures the number of times that the current liabilities could be paid using cash and marketable securities
cash ratio
It is the time required to complete one collection cycle from the time receivables are recorded, then collected, to the time new receivables are recorded again
receivables turnover
It indicates the average number of days during which the company must wait before receivables are collected
Average age of receivables or days sales outstanding
It indicates how frequently inventory is bought and sold during the year
Inventory turnover
It measures the number of times that the inventory is replaced during the period
Inventory turnover
It shows the average number of days needed to solve each purchase of inventory
Average age of inventory or days in inventory
It indicates how frequently raw materials are bought and used in production
Raw materials inventory turnover
It indicates how frequently goods in process are continued and finished
Goods in process turnover
Shows how long the operating cycle of the company is
Days in operating cycle
It is the time needed to turn cash into inventory, inventory into receivables, and receivables back into cash
? Days in operating cycle
It indicates the time required to complete one payment cycle from the time the payables are recorded then paid to the time new payables are recorded again
Trade payables turnover
It indicates the length of time during which payables remain unpaid
Average age of trade payables or days in trade payables
It shows the time from when the cash is used in operations to the time it is converted into cash again
Cash conversion cycle
It measures the movement and utilization of current assets to meet operating requirement
Current asset turnover
Ratios in Solvency
debt to assets
times interest earned
debt to equity ratio
debt ratio
equity ratio
It indicates the proportion of total assets that creditors finance
Debt to assets
It indicates how many times the company’s interest expense was covered by its net operating income
Times interest earned
It determines the extent to which operations cover interest expense
Times interest earned
Proportion of assets provided by creditors compared to that provided by owners
Debt to equity ratio
Proportion of total assets provided by creditors
Debt ratio
Proportion of total assets provided by owners
Equity ratio
